The spot price of Australia’s largest export earner has fallen nearly 10 per cent to $US131.30 including freight since the start of the month – the lowest level since December – dragging down the share prices of major producers and sparking concerns about forward order books.

There are reports of smaller Chinese buyers beginning to defer or cancel shipments from trading houses, although no local miners contacted by The Australian Financial Review reported customers deferring or cancelling deliveries to date.

Wood Mackenzie principal iron ore analyst, Paul Gray, said market sentiment had “certainly deteriorated" over the last few weeks. “The Chinese steelmakers are still operating on very thin margins," he said.

“Steel prices seem to have strengthened for a little while but stabilised, and now are coming under downward pressure. So there are certainly reports of deferrals of shipments."

Mr Gray said weak demand in Europe that was forcing Brazilian miner Vale to offer more spot cargoes in the Asian market had contributed to the recent fall in the iron ore price.

A similar situation occurred in October last year, when the iron ore price fell to a low of $US116 a tonne – below the price of high-cost Chinese domestic production – before quickly rebounding.

Pengana Global Resources Fund portfolio manager, Tim Schroeders, said the iron ore market was “probably more fragile" at the moment than many analysts believed.

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“It is hard to fathom the extent of potential renegotiations of contracts or cancellations, but we are seeing a deterioration in steel prices, expanding iron ore stockpiles at ports globally," he said. “All of that, along with seasonal weakness, probably leads to softer prices."

Rio
Tinto chief executive
Tom Albanese
last week told investors the miner could “pause for breath" after it completes a planned expansion to 353 million tonnes of production from the Pilbara by 2015, rather than immediately proceed with a further expansion to 453 million tonnes.

BHP Billiton
chief executive
Marius Kloppers
said last week he expected the iron ore market to switch to low to negative growth by 2025, due to a plateau in steel use in China combined with the increasing availability of scrap metal.

BHP is to decide later this year whether to proceed with a $US20 billion expansion that would add 100 million tonnes of production by building an outer harbour at Port Hedland.

Mr Gray said if BHP’s board failed to approve the outer harbour development it would send a signal that the Chinese growth story is not as attractive as it looks.

“It might send a negative message in terms of sentiment," he said. “I guess it keeps some of these higher cost marginal producers of supply in the game for a bit longer, in terms of what it does for supplies." Due to the high cost of domestic supplies in China, Mr Gray believes that barring a repeat of the global financial crisis, the iron ore price will rise in the second half this year and remain above $US120 a tonne until 2016.

Goldman Sachs estimates a 10 per cent fall in the iron ore price would cut 7 per cent from BHP’s earnings in the 2013 financial year and 15 per cent from Rio’s earnings in the current calendar year.

The fall in the spot prices comes as new physical trading platforms are being developed to trade iron ore.

Singapore-based globalORE last night announced Rio, BHP, Vale, Glencore, Minmetals, Baosteel and Fortescue Metals Group shareholder Hunan Valin would be founding equity holders in the new platform. globalORE expects to announce a date for the start of trading in the coming week.

Chinese platform CBMX, in which the major miners are also participating, began trading earlier this month.

BHP and Rio are both trading near three-year lows, although shares in both bounced yesterday after Chinese Premier
Wen Jiabao
said China would give more priority to growth.